Alongside a broader rebound in traveling demand and all airline stocks, shares of low-cost, domestic-focused airline carrier Spirit Airlines (NYSE:SAVE) have rallied big over the past month. From its mid-May lows, SAVE stock has more than doubled.
This big rally in SAVE stock is both entirely warranted, and will continue over the next six to 18 months.
In essence, a large portion of U.S. consumers and legislators have decided that, given recent changes in science, the social and economic consequences of a continued nationwide shutdown outweigh the human cost of the novel coronavirus pandemic. To that end, state and local authorities have begun reopening their economies over the past month. And consumers have normalized their economic and social behaviors. Also to that end, the emergence of a “second wave” of Covid-19 won’t derail this recovery, but rather simply slow it.
Accordingly, consumer and business travel demand will continue to recover at a gradual pace over the next six to 18 months. As it does, Spirit Airlines growth trends will meaningfully improve, and beaten-up SAVE stock will stay in rebound mode.
Net net, don’t fade this rally in SAVE stock. Buy it. Shares have visible 50%+ upside potential from here.
A Persistent Recovery
The current recovery in economic activity (U.S. retail sales jumped 17% month-over-month in May) and air travel (U.S. air traffic is up 400% from its mid-April lows) will likely persist for the foreseeable future, even through the emergence of a potential second wave of Covid-19.
When Covid-19 first emerged, we didn’t know much about the virus, so we assumed the worst. Big death rate. Super contagious. Lots of asymptomatic spread.
But, we’ve learned a lot about the virus since February. The more we’ve the learned, the less “scary” the virus as become.
Indeed, according to the CDC’s most recent best estimates, Covid-19 is significantly less dangerous and lethal than the seasonal flu for individuals under the age of 50, and about equally as dangerous and lethal as the flu for individuals aged 50 to 64. Combined, those individuals represent 84% of the U.S. population.
This change in science – coupled with a flattening of the curve – has prompted a change in policy and consumer behavior. As such, it will take more than just a new rise in cases to scare consumers back inside and force another complete shutdown. It will take a new rise in cases and a change in science to show that the virus is more dangerous and lethal than what the science shows today.
Right now, we are only slightly getting one of those factors. We are unlikely to get the second factor – a change in science – because the present trend is that more we find out about the virus, the less dangerous we discover it to be.
Thus, for the foreseeable future, new coronavirus cases, economic activity and air travel will actually all rise simultaneously. Air travel demand will especially rise as we head into the summer season, and “cabin fever” families go on vacations.
Spirit Airlines Stock to $30?
By my numbers, Spirit Airlines stock has upside to $30 over the next 18 months.
My modeling makes two big assumptions:
- Global air traffic travel will almost fully recover by 2022, in the first full-year after a Covid-19 vaccine has been released to the public (assuming a vaccine gets administered in 2021).
- Low-cost, domestic air travel will lead this recovery, since consumers and businesses will be more comfortable traveling short distances first, and will look to do so on a budget given the state of the economy.
Given those headline assumptions, the numbers are easy to follow.
Spirit Airlines reported operating revenues of $3.8 billion on 13.5% operating margins in 2019. As an ultra low-cost, domestic airline carrier, Spirit appears well positioned to once again hit $3.8 billion in revenues by 2022.
Operating margins won’t recover to 13.5% due to heavier spend on routine and thorough cleaning. They’ll likely settle around 10% by 2022. Assuming so, my modeling suggests that a reasonable 2022 earnings per share target for Spirit is $3.
SAVE stock normally trades around 10-times forward earnings. Based on that historically average multiple and $3 in 2022 earnings per share, a reasonable 2021 price target for this stock is $30.
Shares trades hands below $20 today.
Thus, over the next 18 months, SAVE stock has 50%+ upside potential on the back on rebounding travel demand.
Bottom Line on SAVE Stock
The airline industry was hammered by Covid-19. Now, it’s in recovery mode. It will take more than a slight rise in cases and hospitalizations to derail this recovery. It will take a huge rise in cases and hospitalizations, and a change in science to show that this virus is much more dangerous and lethal than presently thought.
I view it as unlikely that both of those things happen over the next few months. Consequently, I view it as likely that the current recovery in economic activity, consumer spending and air travel persists, albeit at a slower rate to account for more consumer caution.
As it does, SAVE stock will stay in rebound mode.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
